European manufacturers are struggling to break as the car industry enters the electric and digital age. Despite a century of global leadership, employing over 13 million Europeans and contributing over €1 trillion in GDP [1], Europe’s automakers face increasing challenges from third-country competitors and decarbonisation targets.
According to the Draghi Report [2], Europe’s automotive sector suffers from high production costs, lack of technical capabilities, supply chain dependencies, and declining brand value. Jobs are being lost in Europe at an alarming rate. To retain its position as a global leader, Europe must radically adapt to the new status quo.
Electric Vehicles — Made in Europe?
European manufacturers have been slow to produce lower-emission models. Though the European Automobile Manufacturers’ Association argues that there is low demand among Europeans for electric vehicles [3], where demand does exist, it is mainly being filled by third-country competitors.
U.S.-marque Tesla currently dominates the battery-electric market in Europe. In 2024, Tesla’s Model Y and Model 3 were the two most popular models for new EVs, with more than 320,000 new registrations in the EU. The third most popular electric model, the Volvo EX30, counted just over 70,000 registrations [4]. Among hybrid vehicles, which accounted for the largest share of new car registrations in January 2025 (34.9%) [5], the Toyota Yaris and Yaris Cross emerged as the most favoured models.[4]
Moreover, last year, China became the sixth-largest country of origin for new vehicles registered in the EU-27.[4] This growth is partly generated by Chinese state subsidies on EVs, which means they can be sold at lower prices than European models. The Commission responded to this in 2024 by imposing up to 45% tariffs on Chinese electric vehicle imports [6].
Action Plan for the Automotive Sector
On March 5, the Commission published the Industrial Action Plan for the European Automotive Sector, developed through a Strategic Dialogue with over 100 companies and organisations.
The roughly 40 proposed actions display the Commission’s vision for the future: boost demand, remove barriers, unlock innovation and level the playing field. Some of the most notable measures include delaying fines for missed emissions targets until 2027 (with compliance to now be measured over three years of sales), a battery package to boost the use of made-in-the-EU components, and incentives for corporate buyers to switch to electric vehicles. With the right measures in place, the Commission hopes European consumers will start buying European electric cars.
EU – US Automotive Trade
While the Commission focuses on home-grown production, Donald Trump would like to see more American vehicles sold in Europe. In January 2025, the U.S. president told the World Economic Forum, “They don’t take our cars. Yet, they send cars to us by the millions.” [7] Days later, the White House announced its intention to impose 25% duties on European cars, pharmaceuticals, and chips, to come into force in early April [8].
Currently, the EU imposes 10% tariffs on American-made cars, which is four times higher than the U.S.’s 2.5% import duties [9]. American vehicles are less popular in the EU than European and Asian models, with only two U.S. companies, Ford and Tesla, ranked among the EU’s top 20 brands for newly registered cars in 2024.
Though tariffs on EU vehicles have not yet been confirmed, Trump has already instated 25% duties on Canadian and Mexican imports, though these were subsequently postponed until April. Even without specific restrictions on European cars, tariffs on Mexico and Canada would also spell trouble for European automakers.
Manufacturers taking advantage of the North American Free Trade Agreement often use Canadian and Mexican components and assembly plants for vehicles sold on the U.S. market. Volkswagen Group, Stellantis and BMW, all of which have factories in Mexico, saw their stock prices drop when tariffs on Canadian and Mexican imports came into effect in early March [10].
Avoiding a Trade War
Many believe that preventing a potentially disastrous trade war is the most crucial step for the Commission to protect the European automotive industry. Bernd Lange, the chair of the European Parliament’s Committee on International Trade, and BMW CEO Oliver Zipse have both called for the EU to cut the standing tariff to 2.5% [11].
In February, EU Trade Commissioner Maroš Šefčovič flew to Washington to offer the new President a ‘Package of Cooperation’ in the hopes of avoiding tariffs. Šefčovič indicated that he was willing to lower the EU’s 10% tariffs [12], though after successive meetings with U.S. counterparts, the Commissioner reported that the United States appeared unwilling to compromise [13]. Furthermore, following the introduction of tariffs on aluminium and steel products on 12 March, and the EU’s response of duties on certain U.S. imports, the chance of avoiding further restructures may be in decline.
A Balanced Approach
The situation is still hypermobile. Trump has demonstrated that he’s willing to impose tariffs on the U.S.’s major trading partners, but also that he’s willing to put these on hold.
The Commission now faces the challenge of balancing the safeguarding of the automotive industry with the prevention of an escalating trade war with the United States. A cooperative approach, focusing on mutual tariff reductions and deeper transatlantic industrial partnerships, may be the best solution to ensure the long-lasting competitiveness of the EU’s car industry and a solid bedrock for the fuel transition.
About the author.
Abigail Osbourne is an EU Issue Tracker Policy Researcher (Transport) at FiscalNote.
